Car manufacturers remain cautious despite record earnings

“We are moving from a chaotic world to a fragmented if not a wild world,” said Stellantis CEO Carlos Tavares in the very start of his speech to investors as the company revealed record profits. The big automotive companies last week revealed almost universally excellent financial results, led by Stellantis’s incredible 14.1% profit margin. But even as top executives flagged an easing of the chip supplies that have severely curtailed production over the past 12 months, the overall message was one of caution in the face of global uncertainty. If anyone thought the industry was reverting back to the carefree days of 2019, they were encouraged to think again. The chip crisis is part of an automotive long Covid, a knock-on effect of the pandemic disruption. And in the midst of that came Russia’s brutal invasion of Ukraine, which is still reverberating through the automotive industry, including potential shortage of gas in Europe due to Russia throttling back supplies. “It just feels like ‘what's next?',” Jim Farley, CEO of Ford, told investors. Car makers are achieving strong first-half profits amid curtailed production and rising raw material prices because they have ceased discounting, raised prices, cut marketing budgets and implemented deep cost-cutting that began even before the pandemic. Understandably, they are reluctant to go back to the old days. “The whole organisation learned we could work very profitably with much less incentives. We will stay disciplined,” Arno Antlitz, chief financial officer for the Volkswagen Group, told investors. The VW Group's profit grew 16% to €13.2 billion (£11.1bn) in the first half, giving it a profit margin of 10.6%. All car companies said they will be cautious about building more cars for dealer stock, even as chip supplies ease. Renault said it is running at stock levels 87% below last year. The company’s order book is currently at over four months’ worth of sales, which is too much for Renault CEO Luca de Meo. “My philosophy is two months plus in the order bank and two months minus in stock,” he said on his company’s earnings call. The current situation isn’t sustainable, given customers are waiting six or seven months for a car, but being light in stock is a good strategy given the global uncertainty, de Meo said. Exactly why it is bad to hold a lot of stock with a risk of a downturn was outlined by Tavares at Stellantis. “In terms of sales expenses, it becomes immediately very costly to reduce your inventory,” he said. That's because you’d need to spend a fortune in discounts and marketing to persuade reluctant customers to take the cars. The reason why customers might be wary of buying is because they are facing rising prices across the board, not just with new cars. However, car maker executives either don’t see a recession ahead or are reluctant to voice their concerns. Either way, they think they are protected for just those reasons Tavares mentioned: no one is holding excess stock and customers are still waiting on cars. “If you look at where we're at today relative to where we've been as a company, heading into what could be a potential downturn, we're in much better shape,” Farley said. ”We have three years of pent-up demand, and we have a very strong product line-up.” Executives expressed mixed views about the direction of the raw material prices that have been pushing up costs. Jaguar Land Rover, for example, flagged that the price of key materials is coming down. Chief financial officer Adrian Mardell told investors that going into the second quarter in April, aluminium had been $3500 a tonne, but coming out it had dropped to $2400. Palladium, too, was down $300 a tonne. As a result, JLR booked inflationary costs of £160 million for the quarter instead of the expected £200 million. However, Mardell did warn model prices will rise “later this year”. Meanwhile, Tesla CEO Elon Musk tweeted on Friday that “more Tesla commodity prices are trending down than up.” However, he was less optimistic on his company’s earnings call earlier last week that prices will follow downward. “This is fundamentally dependent on macroeconomic inflation. It’s not something we control,” he said. However, Antlitz warned that the raw material price spike still hadn’t fully flowed through into finished cars. “The first half still benefited from lower prices. There’s significantly more burden in the second half,” he said. Cars being developed now are being done so with the cost-cutting, complexity-reduction mindset developed during the pandemic that will mean fewer options and drivetrain configurations. The good news at Renault is that this philosophy allows for more models, with the company planning 12 launches in 2024. “Now we can do two cars for the price of one,” de Meo said. Additional models coming to Renault include the 5 and 4. The question now is whether car companies will retain this discipline. Ford, for example, is already planning discounts in its home US market in the second half of the year as volumes come back, chief financial officer John Lawler said: “You’ll see prices come down some.” However, the fear of some new shock or escalations of existing tensions could well persuade everyone to stick to the plan. As Tavares said: “I don't want to scare anybody, but we all can imagine what could happen in Europe… We can imagine if US society was to be broken… We can imagine a lot of black scenarios.”